Tuesday, January 29, 2013

China's Price Supports--Emerging Problems

Chinese officials are quite pleased with their policy of steadily raising minimum prices for grains each year. However, there are subtle signs that the minimum price policy is actually re-creating the same problems that plagued the grain marketing system during the 1990s--the "hard to sell" phenomenon is back and farmers are getting paid with IOUs.

Here is a January 17 online post by a rice farmer in Jilin Province on a "local leaders' message board" complaining that the grain depot won't buy his rice:

"Greetings, honored leaders and to everyone who can see my post! I am a farmer in [a town in] Jilin Province and my family planted about 10 shang of paddy rice this year. I have had many years of tough experience as a farmer, sweating every day. It’s not easy to make it to the harvest in the fall and now...I can’t get a single grain [of my rice harvest] from under the snow. No one will buy my rice since the moisture is so high. This is unimaginable!"

"...My town’s grain depot has still not started buying [rice]... The price we were offered [by traders] was low enough to kill us, not enough to cover costs. We have to pass the holiday with no money from our grain...We’re afraid the rice will get moldy when the weather turns warm after half a year--100,000 jin! Then how will we live? My wife is eight months pregnant!"

"How will I get money to buy milk for my child? We need money for fertilizer, seed, and pesticide--what will we do! Each leader should think of a solution each time he eats a meal. This looks like a small matter to the leaders, but it’s the lifeblood of us peasants! ...How could a small farmer bother you! But I still need to say I hope leaders will see we farmers really do not have it easy! Can any leaders help farmers?"

The Sina.com news site has a collection of about a dozen similar articles and a CCTV video on the "hard to sell" problem for wheat producers in Henan and Anhui Province in 2012. These include reports about farmers hauling their grain to depots that are not buying grain at the minimum price or have no cash.

One article says, "The 'hard to sell' problem has reappeared in some grain-producing provinces. It's a little more widespread and a little more serious this year." It says that in some places the abundant harvest produced a "vicious circle" of "hard to sell" problems.

On January 23, an Economy Times reporter wrote about his investigation of the failure of the minimum price policy to help rice farmers in Anhui Province, asserting that the big harvest had not enriched farmers. He found that there are only a few scattered grain depots and many of them were not buying rice at the minimum price, either because they hadn't gotten funds or they had already filled their warehouse. Many farmers sold their rice to small traders at a low price--some not even receiving an IOU, while others just kept their rice on-farm.

In Hujiang County, the reporter found there were 14 grain depots, but only 2 were qualified to buy rice under the minimum price policy. Most farmers would have to haul their rice to a far-away township to sell at the minimum price. The reporter accuses the local Sinograin company of having little interest in carrying out the minimum purchase program. One warehouse had already been buying rice before the minimum price program for late rice began in November and they had no storage space left. The rice-purchase program was scheduled to last from November 26 to December 31, but rain and snow during that period made it difficult to sell grain.

Many grain stations in Anhui reportedly refused to buy grain that didn't meet the standard for the program or they downgraded it, which meant the price was lower. Local people say that a fifth of grain fails to meet the grade in a normal year, and the proportion rises to a third in bad years. The quality of the 2012 crop was not so good. One farmer said she had just sold 4,500 kg of rice to a small trader for a low price so she could get something for it. She thinks the trader is clever enough to resell it at a higher grade and make money on it.

Funds are delayed in arriving for payment to farmers. There are numerous steps and approvals needed in the hierarchy of grain companies and the Agricultural Development Bank. Some depots delay loans to save money on interest. Farmers get IOUs when the money doesn't arrive on time.

Officials in production areas complain that they serve as warehouses for cities. When the demand is strong and the price is good, traders come to Anhui from Zhejiang and Jiangsu Provinces to buy most of the grain. In some years they don't come, and it has to be stockpiled in the producing area. In this instance the local government has to bear a lot of the financial burden of holding the grain.

The Economy Times reporter concludes that the program intended to benefit farmers actually benefits traders.

Probably as a rebuttal to these concerns, the head of the Grain Bureau issued a statement highlighting that nearly 37.5 mmt of grain had been procured in 2012 for policy purposes. That was 11.9 percent of the grain procured by all enterprises.

Clearly, a price support program is much more difficult to implement than it is to describe it in an economics textbook. The interesting thing is that the phenomena of depots refusing to buy grain, downgrading grain, and issuing IOUs is exactly what happened in the 1990s when the government first tried to subsidize grain by instituting "protection prices". The government ended up banning private grain trade to prevent them from undermining the system. Grain depots were not inclined to buy grain at premium prices that would be impossible to resell profitably while private competitors bought it at a lower price and made quick profits.

The same thing is happening now and it will become more prevalent as the government continues trying to artificially raise the price. As is the case with many market-distorting policies they fail to accomplish their stated purpose and help only those who are clever enough to game the system.

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